It's hard to get excited about Iofina's (LON:IOF) recent performance, with its share price down 31% in the past three months. But if you pay close attention, given how the market typically rewards companies with strong financial health, the company's strong financials could mean a higher share price over the long term. You may be wondering if that means something. In this article, we decided to focus on Iofina's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. More simply, it measures a company's profitability in relation to shareholder equity.
Check out our latest analysis for Iofina.
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Iofina's ROE is:
15% = USD 6.6 million ÷ USD 45 million (based on trailing twelve months to December 2023).
“Revenue” is the income a company has earned over the past year. This means that for every £1 of shareholders' equity, the company generated £0.15 of profit.
What is the relationship between ROE and profit growth rate?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to assess a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain.” Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don't have the same characteristics.
Iofina's earnings growth and ROE 15%
At first glance, Iofina appears to have a decent ROE. His ROE for the company looks pretty good, especially when compared to the industry average of 7.6%. Perhaps as a result of this, Iofina has been able to grow its net profit by an impressive 50% over the past five years. We think there may be other aspects that are positively impacting the company's earnings growth. For example, a company with a low dividend payout ratio or a company with efficient management.
The company's net income growth is quite impressive considering the industry has shrunk profits at a rate of 2.5% over the past few years.
The foundations that give a company value have a lot to do with its revenue growth. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). Doing so will help you determine whether a stock's future is promising or ominous. One good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So it might be worth checking whether Iofina is trading on a higher or lower P/E relative to its industry.
Does Iofina reinvest its profits efficiently?
Iofina does not pay regular dividends to its shareholders. This means that the company reinvests all of its profits back into the business. This is likely what is driving the high earnings growth rate discussed above.
conclusion
Overall, we are very satisfied with Iofina's performance. Specifically, we like that the company reinvests a huge amount of its profits at a high rate of return. Of course, this significantly increased the company's revenue. If the company continues to grow its revenue as it has been, this could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Remember that the price of a stock also depends on its perceived risk. Therefore, investors should always be informed about the risks involved before investing in a company. To learn about the two risks he has identified for Iofina, visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
